Inferior assets and aggressive performance assumptions have pushed the commercial mortgage-backed securities landscape into unfamiliar territory, prompting Fitch Ratings to fire off a few warning shots about large loan CMBS securitizations.
As for what is causing the shift?
Fitch says cheaper bond pricing in the large-loan CMBS market, more competition among lenders and escalating CMBS issuance.
In just the first four months of the year, CMBS issuance soared to $11 billion, compared to $11.2 billion for the entire 2012 fiscal year.
"While Fitch has been rating large loan transactions for nearly 20 years, many of the recent offerings are being provided with credit protection that Fitch views as insufficient to achieve the desired ratings," Fitch analysts wrote.
"Today’s market includes assets whose quality was previously seen only in CMBS conduits which are better protected through diversified collateral. Because they are conduit quality assets, they deserve conduit quality assumptions, which would result in lower rated debt levels."
Fitch suggests investors need to be a bit more inquisitive when evaluating large loan CMBS deals, paying extra attention to property level attributes, the low interest rate environment, interest-only loans and aggressive income growth expectations that deserve extra scrutiny, Fitch said.